Unlimited marital transfer

This is used by many people as the most simplistic way of getting all money from the deceased spouse to a surviving spouse upon the first death. I'll provide two examples.

In the first, the total estate is $300,000 and the man dies. Assuming he owned $150,000 of that (not necessarily true in separate property states and nor necessarily true even in community property states if some assets were held outside of the community property designation.) Remember, all material developed is based on situations that might exist for 25% to 75%+ of the populace. You may NOT be in this category (even though you may think so) and that is why you need outside expertise to probably assist you. DON'T ASSUME). The husband, through a will could pass all his $150,000 to the wife under the unlimited marital transfer with NO tax and NO probate.

In the second example, assume the estate was $800,000 and the wife dies. All $400,000 of the husband's monies could all go directly to the wife with no current estate tax. So far so good. But when the wife dies, she (or her estate actually) has unnecessary taxes due. That's because each person, as identified elsewhere, has $675,000 of assets to exclude from taxes during their lifetime (though almost all use it at death). She would therefore have $125,000 taxable for a tax of $47,300 which equals 5.91% of the entire estate.
Husband dies Wife Receives
All his assets to spouse $800,000
$675,000 exemption
$125,000 taxable estate
$47,300 tax

Testamentary trust and living/revocable trust

Assume a couple has $1,350,000 in an estate. Can they utilize the unlimited marital transfer in a better way to reduce taxes? Yes, by allowing the deceased's estate to use his/her $675,000 lifetime exemption. In the above example, and under a complete unlimited marital transfer, none of the deceased's $675,000 exemption was utilized. And if you don't use it, you lose it and it cannot be added to the $675,000 exemption of the surviving spouse. So what can you do? Under a simplistic example, you set up a trust at the first to die equal to the exemption allowed- the $675,000.
Husband dies Wife receives or simply keeps her $675,000 Wife dies (assume no asset growth)
$675,000 goes into irrevocable trust She can get income, support and maintenance from trust and even the greater of $5,000 or 5% of trust annually $675,000
$675,000 exemption $675,000 exemption
No estate/no tax No estate/no tax

So the estate has saved $47,300 in estate taxes. The beneficiaries receive the proceeds from both trusts at the last to die so they have not lost anything. In fact they gained by not having the estate pay $47,300 to the IRS.

What are the other issues? In order to get the $675,000 into the estate of the first to die, it must already have been in a living trust so that it would also avoid probate. (You can use a testamentary trust- but it would require probate.) For detailed comments, go to the full text on estate planning. However, I will offer some brief comments regarding trusts. For most people, putting your assets in a trust should not alter anything you did before save for the fact that you need to buy and sell everything in the trust's name instead of individually or as community property. It really is a management tool that has been unfortunately marketed as way of saving estate tax. True, it can do that, but it is usually an extraneous reason for setting one up. You also need to recognize that a good one may cost $1,000 or more to set up. And there are always caveats and problems to anything. For example, you should not gift directly from a trust. Lastly, as a reminder and cautionary note, find an estate planning attorney, not just any attorney, particularly if you have lot of assets, kids, a business, etc.

If the assets were not already in a trust, they can end up there anyway but they'll have to go through probate. That is a testamentary trust set up through the will. In California, with a probate transfer of $675,000 into a trust, it can cost $14,650+ for the attorney. Add the possible $14,650+ for the executor (executors, in my opinion, should not work for free) and you have a probate cost of $29,300+ in California. Obviously, the payment of a $1,000 or so for a living trust (and assuming the assets are placed inside the trust) can provide a considerable savings later on. It is for that reason (though some minor caveats apply) that I do not see the validity of most testamentary trusts.

Estate considerations with living trusts, growth of assets and life insurance.

Assume a couple with Bob age 55 and Mary age 50. Bob will live to age 77, Mary to age 85. (Don't always assume someone will live forever. Adjust these actuarial ages as necessary for the individual circumstances. But just be sure someone has the ability to use a financial calculator to figure out how much the assets will grow to or the planning may be a waste of time.) The current assets are $350,000 and will grow at 9% for 22 years till Bob's death= $2,300.000. If trusts were used, Bob's estate would exclude $675,000 in the first to die trust (which, remember, becomes irrevocable upon death) and the remaining $1,625,000 would continue to grow until Mary died at 85- another 13 years. But (gasp!) that amount is now (roughly) $5,000,000.

The "normal" procedure is to put $675,000 into Bob's estate so it can use its $675,000 exemption. therefore no tax

Bob's death= $675,000 estate minus $675,000 exclusion= NO TAX

Total Estate = $2,300,000 and Husband dies. The remaining $1,675,000 goes to Mary and grows to (we'll say) $5,000,000
Irrevocable Trust of Deceased Husband Wife Receives Wife Dies
$675,000 $1,625,000 $5,000,000
$675,000 exemption plus income from trust and possible support and maintenance and the greater of $5,000 or 5% of trust assets. $675,000 exemption
No tax $4,325,000 taxable estate
$2,019,550 tax

At Mary's death: $5,000,000 estate minus 675,000 exclusion = $4,325,000 taxable estate equals $2,019,550 tax.

So assume wife buys life insurance in the amount of $2,000,000 (rounded) just on her since they assume the husband will die first (probably, but not a certainty). But insurance is INCLUDED in estate which would then equal $7,000,000. Subtract $675,000 exemption = $6,325,000 taxable estate = $3,119,550 tax. What really happened is that $2,000,000 of insurance that supposedly would pay the estate tax lost over half its value (55%) due to estate taxes.

Life insurance included in estate

$5,000,000 + $2,000,000- $675,000 exemption = $6,325,000 taxable estate = $3,119,550 estate tax
Wife Dies no insurance Wife dies with $2,000,000 insurance
$5,000,000 $7,000,000 estate
$675,000 exemption $675,000 exemption
$4,325,000 taxable estate $6,350,000 taxable estate
$2,019,550 tax $3,119,550 tax

The addition of the $2,000,000 to the estate actually cost $1,100,000 in additional taxes. Someone else would have to buy insurance (children) or wife would need to set up an irrevocable life insurance trust. Wife CANNOT have any incident of ownership- cannot change beneficiary, cannot borrow, etc.
Irrevocable Life Insurance Trust
$2,000,000 paid to trust upon death of wife
No estate tax

The assumption with just the wife buying insurance is that the wife will die last. Probably true, but not a good bet overall when that amount of money is at state. If she did die first, Bob would have no insurance to cover for the estate tax. One method is to buy a second to die policy for ownership by the beneficiaries or the irrevocable trust in order to keep the proceeds out of the taxable estate.

Second to die policy

Assume same couple but instead of buying a single life policy and having it included in the estate for the proposed survivor (the wife), let's consider a second to die policy which the children buy or which is purchased in an irrevocable life insurance trust.
Husband dies Wife Dies
$675,000 $5,000,000
$675,000 $675,000 exemption
No taxable estate $4,325,000 taxable estate

Irrevocable Life Insurance Trust
$2,000,000 paid to trust upon last to die
No estate tax

 The policy is still $2,000,000 (rounded) but the coverage is now on both Bob and Mary and is only on the last to die. Since there are no incidents of ownership because the policy is owned by the children or the trust, the life insurance proceeds are NOT included in the estate. Nonetheless, buying a $2,000,000 policy that is not expected to be used for 35 years is not exactly something that most consumers would purchase- or should. It is my contention that the proper use of the assets and the trusts along with a first to die- or even separate policies- provides better planning.

Use of assets and life insurance for first to die.

Assume same couple as above. As an alternative to the second to die policy- which is probably a tough sale for estate taxes projected 35 years in the future- much of the assets could have actually been taxed in the first to die. Assume $1,500,000 of the assets were to appreciate at 11% and the remaining $800,000 at only 2%. Assume the $1,500,000 is put in the first to die irrevocable trust and taxed then. That leaves "only" $800,000 for the survivor at 2%, 13 years = $1,035,000. Total taxes =
Husband Dies Wife receives Wife dies 13 years later
$1,500,000 $800,000 growing at 2% $1,000,000
$675,000 exemption Plus income and support and maintenance and greater of $5,000 or 5% of trust from deceased husband. $675,000 exemption
$825,000 effective taxable estate $325,000 effective taxable estate
$338,300 tax $125,300 tax

Total tax is $463,600 or $1,555,950 LESS than under second to die policy use. Survivor has lost some control of assets, but perhaps in advancing years, it may be better that a separate trustee handle the first estate. Recognize as well that survivor has 5% withdrawal, income, some other access to funds from the irrevocable trust so is left far from destitute. I REPEAT- LOOK AT THE 5% RULE AND OTHER MEASURES THAT ALLOW DISTRIBUTIONS FROM THE TRUST FOR THE SURVIVING SPOUSE. THE 5% RULE IS SELDOM- IF EVER- MENTIONED IN THE ATTORNEY SEMINARS I HAVE ATTENDED. You cannot offer a second to die solution to estate planning unless the other planning opportunities have at least been addressed and discounted- including the reasons why IN WRITING to the trustees. Is this done? Not to my knowledge.

The first to die policy would only cover (roughly) $350,000 with a second to die of $150,000 and is far less expensive than, quite obviously, separate life policies or a $2,000,000 second to die.

The key to recognize is that the $1,500,000 in the deceased husband's irrevocable trust is still growing at 11% and is worth, assuming no distributions, $5,824,000 when the wife finally dies. That would have been taxed substantially, but since it had already been taxed, it is not taxed again. Quite a savings. Admittedly, there is no further step up in basis at that time and at the higher value, but I still submit that it is better planning.

Additionally, the use of a first to die- even separate policies- allow some latitude to the survivor to use some of the insurance for immediate needs since "things change" Yes, the insurance is added to the estate for possible taxation, but we are dealing with much smaller amounts of policy funds and with probable overall lower tax rates. An irrevocable trust could be used here as well or by beneficiaries. The point being is that individual planning with the trusts, assets at various growth rates, etc. can be effectively designed to provide money for the survivors and reduce overall estate tax than that normally contemplated under a second to die. It is my opinion that this is far better estate planning and precludes the use for a lot of second to die policies.

Lastly is an issue that many planners and agents do not properly identify. Most people buying life insurance, particularly for estate planning purposes, buy the WRONG type. You do NOT want cash value buildup in these policies since the whole idea is to leverage the amount of insurance as much as possible. A dollar's worth of cash in a policy pays only a dollar's worth of estate taxes and makes little sense for the use of traditional use of whole, universal or variable life (big joke). There are several policies available that are NOT designed to build up cash value (though that happens in a small way anyway) but to pay out the largest amount of insurance. And it is far less expensive than the other policies. (Term policies are universally not advisable since the time frame for term is too short- you may need the policy for 25 years or so- and the cost becomes absolutely prohibitive.)

So, do your homework with estate planning and pick a competent adviser to help you. If you use an attorney- recommended- make sure they have a specialization in estate planning. Many states have designations in this area. Even better, contact the American College of Trust and Estate Counsel, 3415 S. Sepulveda Blvd., Ste. 460, Los Angeles, CA 90034. It includes attorneys who must have practiced for at least 10 years in the field. In my limited dealings with a couple of their members, I was impressed- something not easy to do with me.



LIFE INSURANCE: I was reviewing a second to die policy from an article on life insurance by the American Association of Individual Investors. A couple both age 62 were to spend $38,000+ annually to get a standard survivorship policy with a current death benefit of $630,000 that would grow accordingly.

Policy Year Projected Death Benefit Projected Total Rate of Return

5 $632,554 42%

10 937,211 15

15 1,367,385 10

20 1,937,742 8.2

26 2,850,908 7.1

29 (combined life expectancy) 3,380,752 6.7

30 3,582,125 6.6

33 4,243,134 6.3

35 4,734,044 6.2

Standard second to die whole life policies are almost a complete waste of money. If the couple actually spent $38,000 per year, they could get a current policy of $4,700,000 that would be guaranteed for life. Therefore if the last to die was 82, the beneficiaries would get over $2,700,000 MORE by buying the cheaper policy (versus the $1,937,742).

Here's another one from AAII that suggested that at joint age 52, a couple buy a whole life policy for $20,000 for 13 years ($260,000) that would have an initial death benefit of $335,000 that would grow to $1,921,000 in 38 years (joint life expectancy) which would be 90 years of age for the last to die. I simply took $5,400 and bought a $1,700,000 CURRENT death benefit that was guaranteed for life. Admittedly, you must pay the $5,400 for life, but if you just divided the $260,000 by $5,400, it would equal 48 years of payments which would be to age 100. Admittedly if the last to die did die at age 90, my policy paid less. But at anywhere less than age 85, and my policy paid a lot more. And remember, I did not even include interest on the savings over the high policy premiums during the first 13 years. In other words, I almost always can buy more insurance with the same money than what almost all the other articles indicate. Why is that? Because they have been programed to sell whole life regardless of whether or not it works versus other types of cheaper policies. There is no smoke and mirrors with what I have done- you just have to do more homework. Life agents almost universally promote the wrong survivorship policies. That said, few people should buy survivorship policies anyway since it tends to indicate poor estate planning

OWNERSHIP TITLING: (1999) The IRS rarely allows changes in titling or variations in taxes after death- though a couple exceptions do apply. A change from joint tenancy to community property is possible. And if a deceased has actually used joint tenancy for estate purposes- not an intended gift- the whole property can be in the deceased's estate. Apparently, the IRS is now allowing people who have set up a trust- but not put assets in- to use a disclaimers to get the property into the trust. Forgetting community property states, assume $2,000,000 was held by spouses as joint tenancy. If the husband died, all could go to wife and nothing in the trust of the first to die. But if she disclaims some assets, then $675,000 (currently) could be put in deceased's trust saving estate taxes later on at the second to die. The disclaimer is quite restrictive. The surviving spouse could have received NO benefit from the property after the first death before disclaiming.


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